KUSTOM ENTERTAINMENT, INC. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation. This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The words “believe,” “expect,” “anticipate,” “intend,” “estimate,” “may,” “should,” “could,” “will,” “plan,” “future,” “continue,” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. These forward-looking statements are based largely on our expectations or forecasts of future events, can be affected by inaccurate assumptions, and are subject to various business risks and known and unknown uncertainties, a number of which are beyond our control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. A wide variety of factors could cause or contribute to such differences and could adversely impact revenues, profitability, cash flows and capital needs. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate. 13 Factors that could cause or contribute to our actual results differing materially from those discussed herein or for our stock price to be adversely affected include, but are not limited to: (1) our losses in recent years, including fiscal years 2023 and 2022; (2) economic and other risks for our business from the effects of the COVID-19 pandemic, including the impacts on our law-enforcement and commercial customers, suppliers and employees and on our ability to raise capital as required; (3) our ability to increase revenues, increase our margins and return to consistent profitability in the current economic and competitive environment; (4) our operation in developing markets and uncertainty as to market acceptance of our technology and new products; (5) the availability of funding from federal, state and local governments to facilitate the budgets of law enforcement agencies, including the timing, amount and restrictions on such funding; (6) our ability to maintain or expand our share of the market for our products in the domestic and international markets in which we compete, including increasing our international revenues; (7) our ability to produce our products in a cost-effective manner; (8) competition from larger, more established companies with far greater economic and human resources; (9) our ability to attract and retain quality employees; (10) risks related to dealing with governmental entities as customers; (11) our expenditure of significant resources in anticipation of sales due to our lengthy sales cycle and the potential to receive no revenue in return; (12) characterization of our market by new products and rapid technological change; (13) our dependence on sales of our EVO-HD, DVM-800, DVM-250 and FirstVU products; (14) that stockholders may lose all or part of their investment if we are unable to compete in our markets and return to profitability; (15) defects in our products that could impair our ability to sell our products or could result in litigation and other significant costs; (16) our dependence on a few manufacturers and suppliers for components of our products and our dependence on domestic and foreign manufacturers for certain of our products; (17) our ability to protect technology through patents and to protect our proprietary technology and information, such as trade secrets, through other similar means; (18) our ability to generate more recurring cloud and service revenues; (19) risks related to our license arrangements; (20) the fluctuation of our operation results from quarter to quarter; (21) sufficient voting power by coalitions of a few of our larger stockholders, including directors and officers, to make corporate governance decisions that could have a significant effect on us and the other stockholders; (22) the issuance or sale of substantial amounts of our Common Stock, or the perception that such sales may occur in the future, which may have a depressive effect on the market price of our securities; (23) potential dilution from the issuance of Common Stock underlying outstanding options and warrants; (24) our additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our Common Stock; (25) the volatility of our stock price due to a number of factors, including, but not limited to, a relatively limited public float; (26) our ability to integrate and realize the anticipated benefits from acquisitions; (27) our ability to maintain the listing of our Common Stock on the Nasdaq Capital Market. Current Trends and Recent Developments for the Company Overview Video Solutions Operating Segment – Within our video solutions operating segment we supply technology-based products utilizing our portable digital video and audio recording capabilities for the law enforcement and security industries and for the commercial fleet and mass transit markets. We have the ability to integrate electronic, radio, computer, mechanical, and multi-media technologies to create positive solutions to our customers’ requests. Our products include: the EVO-HD, DVM-800 and DVM-800 Lite, which are in-car digital video systems for law enforcement and commercial markets; the FirstVU body-worn camera line, consisting of the FirstVu Pro, FirstVu, and the FirstVU HD; our patented and revolutionary VuLink product integrates our body-worn cameras with our in-car systems by providing hands-free automatic activation for both law enforcement and commercial markets; the FLT-250, DVM-250, and DVM-250 Plus, which are our commercial line of digital video mirrors that serve as “event recorders” for the commercial fleet and mass transit markets; and FleetVu and VuLink, which are our cloud-based evidence management systems. We further diversified and broadened our product offerings in 2020, by introducing two new lines of branded products: (1) the ThermoVu® which is a line of self-contained temperature monitoring stations that provides alerts and controls facility access when an individual’s temperature exceeds a pre-set threshold and (2) our Shield™ disinfectants and cleansers which are for use against viruses and bacteria. Revenue Cycle Management Operating Segment - We entered the revenue cycle management business late in the second quarter of 2021 with the formation of our wholly owned subsidiary, Digital Ally Healthcare, Inc. and its majority-owned subsidiary Nobility Healthcare. Nobility Healthcare completed its first acquisition in June 2021, when it acquired a private medical billing company, and have since completed three additional acquisitions of private medical billing companies, in which we will assist in providing working capital and back-office services to healthcare organizations throughout the country. Our assistance consists of insurance and benefit verification, medical treatment documentation and coding, and collections. Through our expertise and experience in this field, we maximize our customers’ service revenues collected, leading to substantial improvements in their operating margins and cash flows. 14 Entertainment Operating Segment - We also entered into live entertainment and events ticketing services through the formation of our wholly owned subsidiary, TicketSmarter and its completed acquisitions of Goody Tickets, LLC and TicketSmarter, LLC, on September 1, 2021. TicketSmarter provides ticket sales, partnerships, and mainly, ticket resale services through its online ticketing marketplace for live events, TicketSmarter.com. TicketSmarter offers tickets for over 125,000 live events through its platform, for a wide range of events, including concerts, sporting events, theatres, and performing arts, throughout the country. We also offer production and promotion of live music events in third-party venues throughout the country. These services begin with the logistical matters of an event, including artist booking and research, ticketing, staging, on-site operations, vendor sourcing, and day of production. Business Combination In June 2023, the Company, entered into the Merger Agreement with Clover Leaf, Merger Sub, Yntegra Capital Investments LLC, a Delaware limited liability company, in the capacity as the representative from and after the Effective Time (as defined in the Merger Agreement) for the stockholders of Clover Leaf in accordance with the terms and conditions of the Merger Agreement, and Kustom Entertainment. Pursuant to the Merger Agreement, subject to the terms and conditions set forth therein upon the consummation of the transactions contemplated by the Merger Agreement, Merger Sub will merge with and into Kustom, with Kustom continuing as the surviving corporation in the Merger and a wholly owned subsidiary of Clover Leaf. Upon the Closing which is subject to the approval of Clover Leaf’s shareholders and the satisfaction or waiver of certain other customary closing conditions, the common stock of the combined company is expected to be listed on the Nasdaq under a mutually agreed new ticker symbol that reflects the name “Kustom Entertainment”. Segment Overview Our reportable segments are: 1) video solutions, 2) revenue cycle management, and 3) entertainment. Video Solutions Operating Segment Our video solutions segment revenue encompasses video recording products and services for our law enforcement and commercial customers and the sale of Shield disinfectant and personal protective products. This segment generates revenues our subscription models offering cloud and warranty solutions, and hardware sales for video and personal protective safety products and solutions. Revenues for product sales are recognized upon delivery of the product, and revenues from our cloud and warranty subscription plans are deferred over the term of the subscription, typically 3 or 5 years. To judge the health of our video solutions segment, we review the current active subscriptions and deferred service revenues, along with the quantity and gross margins generated by our video solutions hardware sales. Revenue Cycle Management Operating Segment Our revenue cycle management segment consists of our medical billing subsidiaries. Revenues of this segment are recognized after we perform our obligations of our revenue cycle management services. Our revenue cycle management segment is services performed and such services are charged monthly, generally based on a contractual percentage of total customer collections, for which we recognize our net service fees. To judge the health of our revenue cycle management segment, we review the collection success rate and collection timing. In addition, we review the associated costs incurred to assist our customers, and any changes in operating margins and cash flows. Entertainment Operating Segment Our entertainment operating segment consists of ticketing services provided through TicketSmarter and its online platform, TicketSmarter.com. Revenues of this segment include ticketing service charges generally determined as a percentage of the face value of the underlying ticket and ticket sales from our ticket inventory which are recognized when the underlying tickets are sold along with tickets, concession, merchandise, and other sales from the live events produced by this segment. Direct expenses include the cost of tickets purchased for resale by the Company and holds as inventory, artist costs, staging costs, credit card fees, ticketing platform expenses, website maintenance fees, along with other administrative costs. 15 To judge the health of our entertainment operating segment, we review the gross transaction value, which represents the total value related to a ticket sale and includes the face value of the ticket as well as the service charge. In addition, we review the number of visits to our websites, cost of customer acquisition, the purchase conversion rate, the overall number of customers in our database, and the number and percentage of tickets sold via the website and mobile app. Summary Financial Data Summarized financial information for the Company’s reportable business segments is provided for the years ended December 31, 2023, and 2022: Years Ended December 31, 2023 2022 Net Revenues: Video Solutions $ 7,471,285 $ 8,252,288 Revenue Cycle Management 6,713,678 7,886,107 Entertainment 14,063,381 20,871,500 Total Net Revenues $ 28,248,344 $ 37,009,895 Gross Profit (loss): Video Solutions $ 1,290,509 $ (1,250,277 ) Revenue Cycle Management 2,772,271 3,303,477 Entertainment 1,699,704 268,741 Total Gross Profit $ 5,762,484 $ 2,321,941 Operating Income (loss): Video Solutions $ (7,135,584 ) $ (9,278,721 ) Revenue Cycle Management 292,543 357,705 Entertainment (3,646,770 ) (7,369,241 ) Corporate (11,750,742 ) (13,443,001 ) Total Operating Income (Loss) $ (22,240,553 ) $ (29,733,258 ) Depreciation and Amortization: Video Solutions $ 836,699 $ 769,228 Revenue Cycle Management 104,352 128,082 Entertainment 1,277,186 1,279,369 Total Depreciation and Amortization $ 2,218,237 $ 2,176,679 Assets (net of eliminations): Video Solutions $ 26,396,559 $ 28,509,706 Revenue Cycle Management 2,260,376 2,201,570 Entertainment 6,324,211 11,190,491 Corporate 12,047,663 14,766,295 Total Identifiable Assets $ 47,028,809 $ 56,668,062 16 Segment net revenues reported above represent only sales to external customers. Segment gross profit represents net revenues less cost of revenues. Segment operating income (loss), which is used in management’s evaluation of segment performance, represents net revenues, less cost of revenues, less all operating expenses. Identifiable assets are those assets used by each segment in its operations. Corporate assets primarily consist of cash, property, plant and equipment, accounts receivable, inventories, and other assets. Consolidated Results of Operations We experienced operating losses for all quarters during 2023 and 2022. The following is a summary of our recent operating results on a quarterly basis: For the Three Months Ended: December 31, 2023 September 30, 2023 June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 Total revenue $ 6,228,351 $ 6,337,699 $ 8,062,097 $ 7,620,197 $ 8,879,504 $ 8,484,153 $ 9,351,457 $ 10,294,781 Gross profit 549,031 1,226,149 2,519,505 1,467,799 (1,932,256 ) 595,500 1,719,078 1,939,619 Gross profit margin percentage 8.8 % 19.3 % 31.3 % 19.3 % (21.8 )% 7.0 % 18.4 % 18.8 % Total selling, general and administrative expenses 6,528,031 6,374,192 7,460,209 7,640,605 7,769,389 7,162,523 8,380,330 8,742,957 Operating loss (5,979,000 ) (5,148,043 ) (4,940,704 ) (6,172,806 ) (9,701,645 ) (6,567,023 ) (6,661,252 ) (6,803,338 ) Operating loss percentage (96.0 )% (81.2 )% (61.3 )% (81.0 )% (109.3 )% (77.4 )% (71.2 )% (66.1 )% Net income/(loss) $ (7,484,778 ) $ (3,679,043 ) $ (8,320,549 ) $ (5,979,579 ) $ (9,574,258 ) $ (1,919,071 ) $ (682,187 ) $ (6,698,242 ) Our business is subject to substantial fluctuations on a quarterly basis as reflected in the significant variations in revenues and operating results in the above table. These variations result from various factors, including but not limited to: (1) the timing of large individual orders; (2) the traction gained by products, such as the recently released FirstVu Pro, FirstVu II, FLT-250, EVO HD, the ThermoVu™ and the Shield™ lines; (3) production, quality and other supply chain issues affecting our cost of goods sold; (4) unusual increases in operating expenses, such as the timing of trade shows and stock-based and bonus compensation; (5) the timing of patent infringement litigation settlements (6) ongoing patent and other litigation and related expenses respecting outstanding lawsuits; and (7) the completion of corporate acquisitions including the recent purchases in the revenue cycle management and entertainment operating segments. We reported net loss of $7,484,778 on revenues of $6,228,351 for the fourth quarter of 2023. The factors and trends affecting our recent performance include: ● The Company formed two new operating segments in 2021 and continued to make acquisitions within these segments in 2021 and 2022 resulting in increased revenues and costs. The Company has since focused on the profitability of these segments and resulting in fluctuating revenues and costs on a quarterly basis. The entertainment operating segment generated $14,063,381 and $20,871,500 in revenue during the years ended December 31, 2023 and 2022, respectively, a decrease of $6,808,119 (33%). The revenue cycle management operating segment generated $6,713,678 and $7,886,107 in revenue for the years ended December 31, 2023 and 2022, respectively, a decrease of $1,172,429 (15%). We expect to continue to experience improved results from our two new operating segments and their recent acquisitions, along with improved results from the video solutions segment as the recurring revenue model expands. ● Our objective is to expand our video solutions segment’s recurring service revenue to help stabilize our revenues on a quarterly basis. Revenues from cloud storages have been increasing in recent quarters and reached approximately $572,892 in the fourth quarter of 2023, an increase of $141,725 (33%) over the fourth quarter of 2022. Overall, cloud revenues increased to approximately $1,994,066 for the year ended December 31, 2023 compared to approximately $1,471,860 for the year ended December 31, 2022, an increase of $522,206, or 35%. We are pursuing several new market channels outside of our traditional law enforcement and private security customers, similar to our NASCAR and event security customers, which we believe will help expand the appeal of our products and service capabilities to new commercial markets. If successful, we believe that these new market channels could yield recurring service revenues for us in the future. 17 Off-Balance Sheet Arrangements We do not have any off-balance sheet debt, nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have a material current or future effect on financial conditions, changes in the financial conditions, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses. We are a party to operating leases and license agreements that represent commitments for future payments (described in Note 15, “Commitments and Contingencies,” to our consolidated financial statements) and we have issued purchase orders in the ordinary course of business that represent commitments to future payments for goods and services. For the Years Ended December 31, 2023 and 2022 Results of Operations Summarized immediately below and discussed in more detail in the subsequent sub-sections is an analysis of our operating results for the years ended December 31, 2023 and 2022, represented as a percentage of total revenues for each respective year: Years Ended December 31, 2023 2022 Revenue 100 % 100 % Cost of revenue 80 % 94 % Gross profit 20 % 6 % Selling, general and administrative expenses: Research and development expense 9 % 6 % Selling, advertising and promotional expense 25 % 25 % General and administrative expense 65 % 55 % Total selling, general and administrative expenses 99 % 86 % Operating loss (79 )% (80 )% Change in fair value of derivative liabilities 7 % 18 % Change in fair value of contingent consideration promissory notes and earn-out agreements 1 % 1 % Gain on extinguishment of warrant derivative liability — % 10 % Loss on accrual for legal settlement (6 )% — % Loss on extinguishment of convertible debt (4 )% — % Gain on extinguishment of debt 2 % — % Gain on sale of property, plant and equipment — % 1 % Interest expense (11 )% — % Interest income and other income, net 1 % (1 )% Loss before income tax benefit (89 )% (51 )% Income tax expense (benefit) — % — % Net loss (89 )% (51 )% Net loss attributable to noncontrolling interests of consolidated subsidiary (1 )% (1 )% Loss on redemption – Series A & B convertible redeemable preferred stock — % (6 )% Net loss attributable to common stockholders (90 )% (58 )% Net loss per share information: Basic $ (9.22 ) $ (8.50 ) Diluted $ (9.22 ) $ (8.50 ) 18 Revenues Revenues by Type and by Operating Segment Our operating segments generate two types of revenues: Product revenues primarily includes video solutions operating segment hardware sales of in-car and body-worn cameras, along with sales of our ThermoVu TM units, disinfectants, and personal protective equipment. Additionally, product revenues also include the sale of tickets by our entertainment operating segment that have been purchased or received through our sponsorships and partnerships and held in inventory by our entertainment segment until their sale. Service and other revenues consist of cloud and warranty services revenues from our subscription plan and storage offerings of our video solutions segment. Our entertainment operating segments’ secondary ticketing marketplace revenues are included in service revenue. We recognize service revenue from sales generated through its secondary ticketing marketplace as we collect net services fees on secondary ticketing marketplace transactions. Lastly, our revenue cycle management segment revenues are included in the service revenues for services provided to medical providers throughout the country. The following table presents revenues by type and segment: Year Ended December 31, 2023 % Change 2022 Product revenues: Video solutions $ 4,303,369 (20.3 )% $ 5,401,089 Entertainment 5,044,576 (9.9 )% 5,598,803 Total product revenues 9,347,945 (15.0 )% 10,999,892 Service and other revenues: Video solutions 3,167,916 11.1 % 2,851,199 Entertainment 9,018,805 (40.9 )% 15,272,697 Revenue cycle management 6,713,678 (14.9 )% 7,886,107 Total service and other revenues 18,900,399 (27.3 )% 26,010,003 Total revenues $ 28,248,344 (23.7 )% $ 37,009,895 Our video solutions operating segment sells our products and services to customers in the following manner: ● Sales to domestic customers are made directly to the end customer (typically a law enforcement agency or a commercial customer) through our sales force, comprised of our employees. Revenue is recorded when the product is shipped to the end customer. ● Sales to international customers are made through independent distributors who purchase products from us at a wholesale price and sell to the end user (typically law enforcement agencies or a commercial customer) at a retail price. The distributor retains the margin as compensation for its role in the transaction. The distributor generally maintains product inventory, customer receivables and all related risks and rewards of ownership. Revenue is recorded when the product is shipped to the distributor consistent with the terms of the distribution agreement. ● Repair parts and services for domestic and international customers are generally handled by our inside customer service employees. Revenue is recognized upon shipment of the repair parts and acceptance of the service or materials by the end customer. 19 Our revenue cycle management operating segment sells its services to customers in the following manner: ● Our revenue cycle management operating segment generates service revenues through relationships with medium to large healthcare organizations, in which the underlying service revenue is recognized upon execution of services. Service revenues are generally determined as a percentage of the dollar amount of medical billings collected by the customer. Our entertainment operating segment sells our products and services to customers in the following manner: ● Our entertainment operating segment generates product revenues from the sale of tickets directly to consumers for a particular event that the entertainment operating segment has previously purchased and held in inventory for ultimate resale to the end consumer. Service sales through TicketSmarter, are driven largely in part to the usage of the TicketSmarter.com marketplace by buyers and sellers, in which the Company collects service fees for each transaction completed through this platform. We may discount our prices on specific orders based upon the size of the order, the specific customer and the competitive landscape. Product revenues by operating segment is as follows: Years ended December 31, 2023 2022 Product Revenues: Video Solutions $ 4,303,369 $ 5,401,089 Revenue Cycle Management — — Entertainment 5,044,576 5,598,803 Total Product Revenues $ 9,347,495 $ 10,999,892 Product revenues for the years ended December 31, 2023 and 2022 were $9,347,495 and $10,999,892, respectively, a decrease of $1,651,947 (15%), due to the following factors: ● Revenues generated by the entertainment operating segment began with the Company’s acquisition of TicketSmarter on September 1, 2021. The entertainment operating segment generated $5,044,576 in product revenues for the year ended December 31, 2023, compared to $5,598,803 for the fiscal year ended December 31, 2022. This largely relates to the Company focusing on right sizing and reducing costs and working towards profitability. ● The Company’s video solutions operating segment generated product revenues totaling $4,303,369 during the year ended December 31, 2023 compared to $5,401,089 for the year ended December 31, 2022. In general, our video solutions operating segment has experienced pressure on its product revenues as our in-car and body-worn systems are facing increased competition because our competitors have released new products with advanced features. Additionally, our law enforcement revenues declined over the year ended December 31, 2023 and 2022 due to price-cutting and competitive actions by our competitors, adverse marketplace effects related to our patent litigation proceedings and our recent financial condition. ● Our video solutions operating segment management has continued to focus on migrating commercial customers, from a hardware sale to a service fee model. Therefore, we expect a reduction in commercial hardware sales (principally DVM-250’s, FLT-250’s, and a portion of our body-worn camera line) as we convert these customers to a service model under which we provide the hardware as part of a recurring monthly service fee. In that respect, we introduced a monthly subscription agreement plan for our body worn cameras and related equipment during the second quarter of 2020 that allowed law enforcement agencies to pay a monthly service fee to obtain body worn cameras without incurring a significant upfront capital outlay. This program has gained some traction, resulting in decreased product revenues and increasing our service revenues. We expect this program to continue to hold traction, resulting in recurring revenues over a span of three to five years. 20 Service and other revenues by operating segment is as follows: Years ended December 31, 2023 2022 Service and Other Revenues: Video Solutions $ 3,167,916 $ 2,851,199 Revenue Cycle Management 6,713,678 7,886,107 Entertainment 9,018,805 15,272,697 Total Service and Other Revenues $ 18,900,399 $ 26,010,003 Service and other revenues for the years ended December 31, 2023 and 2022 were $18,900,399 and $26,010,003, respectively, a decrease of $7,109,604 (27%), due to the following factors: ● Cloud revenues generated by the video solutions operating segment were $1,994,066 and $1,471,860 for the years ended December 31, 2023 and 2022, respectively, an increase of $522,206 (35%). We continue to experience increased interest in our cloud solutions for law enforcement primarily due to the deployment of our cloud-based EVO-HD in-car system and our next generation body-worn camera products, which contributed to our increased cloud revenues in the year ended December 31, 2023. We expect this trend to continue for 2024 as the migration from local storage to cloud storage continues in our customer base. ● Video solutions operating segment revenues from extended warranty services were $860,337 and $692,017 for the years ended December 31, 2023 and 2022, respectively, an increase of $168,320 (24%). T his correlates with consistent sales of hardware and additional extended warranties sold during the year . ● Our entertainment operating segment generated service revenues totaling $9,018,805 and $15,272,697 for the years ended December 31, 2023 and 2022, respectively, a decrease of $6,253,892 (41%). The Company completed the acquisitions of Goody Tickets, LLC and TicketSmarter, LLC in the third quarter of 2021, thus resulting in the new revenue stream for the Company during the last fourth months of 2021 and twelve months ended December 31, 2022. TicketSmarter collects fees on transactions administered through the TicketSmarter.com platform for the buying and selling of tickets for live events throughout the country. We expect our entertainment operating segment to continue to fluctuate as we look right-size this segment and work towards profitability . ● Our revenue cycle management operating segment generated service revenues totaling $6,713,678 and $7,886,107 for the years ended December 31, 2023 and 2022, respectively, a decrease of $1,172,429 (15%). Our revenue cycle management operating segment has completed four acquisitions since formation in June 2021, thus resulting in the new service revenue stream added in the twelve months ended December 31, 2022. Our revenue cycle management operating segment provides revenue cycle management solutions and back-office services to healthcare organizations throughout the country. The decrease in revenue is due to refinement within one of the recent acquisitions, as they strive to maximize profitability rather than focus on top line revenue. Total revenues for the years ended December 31, 2023, and 2022 were $28,248,344 and $37,009,895, respectively, a decrease of $8,761,551 (24%), due to the reasons noted above. 21 Cost of Product Revenue Overall cost of product revenue sold for the years ended December 31, 2023, and 2022 was $9,974,890 and $14,372,115, respectively, a decrease of $4,397,225 (31%). Overall cost of goods sold for products as a percentage of product revenues for the years ended December 31, 2023, and 2022 were 107% and 131%, respectively. Cost of products sold by operating segment is as follows: Years Ended December 31, 2023 2022 Cost of Product Revenues: Video Solutions $ 4,824,967 $ 8,332,484 Revenue Cycle Management — — Entertainment 5,149,923 6,039,631 Total Cost of Product Revenues $ 9,974,890 $ 14,372,115 The decrease in cost of goods sold for our video solutions segment products is due to numerous factors including a sizeable increase in the allowance for excess and obsolete inventory in 2022, mostly surrounding the personal protective equipment product line. Cost of product sold as a percentage of product revenues for the video solutions segment decreased to 112% for the year ended December 31, 2023 as compared to 154% for the year ended December 31, 2022. The decrease in entertainment operating segment cost of product sold directly correlates to the lower product revenues for the year ended December 31, 2023. Cost of Product Revenues were $5,149,923 and $6,039,631 for the year ended December 31, 2023 and 2022, a decrease of $889,708 (15%). Cost of product sold as a percentage of product revenues for the entertainment segment decreased to 102% for the year ended December 31, 2023 as compared to 108% for the year ended December 31, 2022. We recorded $4,542,461 and $5,489,541 in reserves for obsolete and excess inventories for the years ended December 31, 2023 and 2022, respectively. Total raw materials and component parts were $3,044,653 and $4,509,165 for the years ended December 31, 2023 and 2022, respectively, a decrease of $1,464,512 (32%). Finished goods balances were $5,322,693 and $7,816,618 for the years ended December 31, 2023 and December 31, 2022, respectively, a decrease of $2,493,925 (32%) which was attributable to a reduction in inventory for the video solutions product lines and a large decrease in ticket inventory for the newly acquired entertainment segment. The decrease in the inventory reserve is primarily due to the disposal of obsolete inventory that was included in the reserves during 2022. Additionally, the Company determined a reasonable reserve for inventory held at the ticket operating segment, in which some inventory items sell below cost or go unsold, thus having to be fully written-off following the event date. We believe the reserves are appropriate given our inventory levels as of December 31, 2023. Cost of Service Revenue Overall cost of service revenue sold for the years ended December 31, 2023, and 2022 was $12,510,970 and $20,315,839, respectively, a decrease of $7,804,869 (38%). Overall cost of goods sold for services as a percentage of service revenues for the years ended December 31, 2023, and 2022 were 66% and 78%, respectively. Cost of service revenues by operating segment is as follows: Years Ended December 31, 2023 2022 Cost of Service Revenues: Video Solutions $ 1,355,809 $ 1,170,081 Revenue Cycle Management 3,941,407 4,582,630 Entertainment 7,213,754 14,563,128 Total Cost of Service Revenues $ 12,510,970 $ 20,315,839 22 The increase in cost of service revenues for our video solutions segment is commensurate with the increase in service revenues in the year ended December 31, 2023 compared to the year ended December 31, 2022. Cost of service revenues as a percentage of service revenues for the video solutions segment increased to 43% for the year ended December 31, 2023 as compared to 41% for the year ended December 31, 2022. The decrease in revenue cycle management operating segment cost of service revenue is commensurate with the decline in revenues due certain loss generating services being eliminated during the year. Cost of service revenues as a percentage of product revenues for the revenue cycle management operating segment increased to 59% for the year ended December 31, 2023 as compared to 58% for the year ended December 31, 2022. The decrease in entertainment operating segment cost of service revenues is due to management right sizing the business working towards profitability. The Entertainment cost of service revenue was $7,213,754 for the year ended December 31, 2023, compared to $14,563,128 for the year ended December 31, 2022. Cost of service revenues as a percentage of service revenues for the entertainment segment decreased to 80% for the year ended December 31, 2023 as compared to 95% for the year ended December 31, 2022. Gross Profit Overall gross profit for the years ended December 31, 2023 and 2022 was $5,762,484 and $2,321,941, respectively, an increase of $3,440,543 (148%). Gross profit by operating segment was as follows: Years Ended December 31, 2023 2022 Gross Profit: Video Solutions $ 1,290,509 $ (1,250,278 ) Revenue Cycle Management 2,772,271 3,303,477 Entertainment 1,699,704 268,742 Total Gross Profit $ 5,762,484 $ 2,321,941 The increase is attributable to the decrease in cost of goods sold across our video and entertainment segments for the year ended December 31, 2023, as there was an overall decrease in the cost of sales as a percentage of overall revenues to 80% for the year ended December 31, 2023 from 94% for the year ended December 31, 2022. This is primarily driven by large inventory reserve being established in 2022, a focus on right sizing recent acquisitions to increase profitability and a transition to a service subscription-based model in our video solutions segment. Our goal is to improve our margins over the longer term based on the expected margins generated by our new recent revenue cycle management and entertainment operating segments together with our video solutions operating segment and its expected margins from our EVO-HD, DVM-800, VuLink, FirstVu Pro, FirstVu II, Shield TM disinfectants and our cloud evidence storage and management offering, provided that they gain traction in the marketplace. We plan to continue our initiative to more efficient management of our supply chain through outsourcing production, quantity purchases and more effective purchasing practices. Selling, General and Administrative Expenses Overall selling, general and administrative expenses were $28,003,037 and $32,055,199 for the years ended December 31, 2023 and 2022, respectively, a decrease of $4,052,162 (13%). The decrease is primarily attributable to a focus on right-sizing the business with a reduction in administrative headcount coupled with a reduction in sponsorships and advertising where costs outweighed the returns. Our selling, general and administrative expenses as a percentage of sales increased to 99% for 2023 compared to 87% in the same period in 2022. The significant components of selling, general and administrative expenses are as follows: Year ended December 31, 2023 2022 Research and development expense $ 2,618,746 $ 2,290,293 Selling, advertising and promotional expense 7,137,529 9,312,204 General and administrative expense 18,246,762 20,452,702 Total $ 28,003,037 $ 32,055,199 23 Research and development expense. Our video solutions operating segment continues to focus on bringing new products to market, including updates and improvements to current products. Our research and development expenses totaled $2,618,746 and $2,290,293 for the years ended December 31, 2023 and 2022, respectively, an increase of $328,453 (14%). We employed 21 engineers at December 31, 2023 compared to 21 engineers at December 31, 2022. Most of our engineers are dedicated to research and development activities for new products, primarily the new generation of body-worn cameras, EVO-HD and EVO Fleet that can be located in multiple places in a vehicle. We expect our research and development activities will continue to trend higher in future quarters as we continue to expand our product offerings based on our new body-worn camera and EVO-HD product platform and as we outsource more development projects . We consider our research and development capabilities and new product focus to be a competitive advantage and will continue to invest in this area on a prudent basis and consistent with our financial resources. Selling, advertising and promotional expenses. Selling, advertising and promotional expenses totaled $7,137,529 and $9,312,204 for the years ended December 31, 2023 and 2022, respectively, a decrease of $2,174,675 (23%). The decrease is primarily attributable to a reduction in promotional and advertising sponsorships and expenses. Promotional and advertising expenses totaled $5,479,437 during the year ended December 31, 2023 compared to $7,668,641 during the year ended December 31, 2022, a decrease of $2,189,204 (29%). The overall decrease is primarily attributable to TicketSmarter’s very active approach to sponsorship and advertising in 2022 as they were aggressively building a brand and gaining recognition. TicketSmarter accounted for $2,328,759 and $4,024,748 of the total promotional and advertising expense for the year ended December 31, 2023 and 2022, respectively. General and administrative expenses. General and administrative expenses totaled $18,246,762 and $20,452,702 for the years ended December 31, 2023 and 2022, respectively. The decrease in general and administrative expenses for the year ended December 31, 2023 compared to the same period in 2022 is primarily attributable to a decrease in administrative salaries, as payroll begins to adjust from the new acquisitions completed by the Company. General and administrative expenses also decreased due to a decline in rent expenses, and legal and professional expenses for the years ended December 31, 2023 compared to the same period in 2022. Operating Loss For the reasons previously stated, our operating loss was $22,240,553 and $29,733,258 for the years ended December 31, 2023 and 2022, respectively, a decrease of $7,492,705 (25%). Operating loss as a percentage of revenues improved to 78% in 2023 from 80% in 2022. Interest Income Interest income decreased to $95,717 for the year ended December 31, 2023, from $131,025 in 2022, which reflects our overall decline in our cash and cash equivalent levels in 2023 compared to 2022. 24 Interest Expense We incurred interest expenses of $3,134,253 and $37,196 during the years ended December 31, 2023 and 2022, respectively. The increase is attributable the amortization of debt discounts associated with the convertible debt, revolving loan agreements and merchant advances. Loss on Accrual for Legal Settlement The Company recognized a loss on accrual for legal settlement of $1,792,308 and $-0- during the years ended December 31, 2023 and 2022, respectively. This is in connection with the ongoing lawsuit with Culp McCauley, Inc. Loss on Conversion of Convertible Debt The Company recognized a loss on conversion of convertible debt of $1,112,705 and $-0- during the year ended December 31, 2023 and 2022, respectively. This is in connection with the convertible notes issued during the year ended December 31, 2023, the conversion from debt to equity and cash settlement of debt during the period. Change in Fair Value of Short-Term Investments We recognized a loss on change in fair value of short-term investments totaling $-0- and $84,818 during the years ended December 31, 2023 and 2022, respectively. Such short-term investments are included in cash and cash equivalents as they contain original maturities of ninety (90) days or less. The decrease reflects our overall lower cash and cash equivalent levels in 2023 compared to 2022. Change in Fair Value of Warrant Derivative Liabilities During the second quarter of 2023, the Company issued detachable warrants to purchase a total of 1,125,000 shares of Common Stock in association with the two secured convertible notes previously described. The underlying warrant agreement terms provide for net cash settlement outside the control of the Company in the event of tender offers under certain circumstances. As such, the Company is required to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the consolidated statement of operations as the change in fair value of warrant derivative liabilities. The change in fair value of the warrant derivative liabilities during year ended December 31, 2023 totaled $1,846,642, compared to $6,726,638 for the year ended December 31, 2022, which was recognized as a gain on the Consolidated Statements of Operations. Change in Fair Value of Contingent Consideration Promissory Notes and Earn-Out Agreements On June 30, 2021, Nobility Healthcare, a subsidiary of the Company, issued a contingent consideration promissory note (the “June Contingent Note”) in connection with a stock purchase agreement between Nobility Healthcare and a private company (the “June Seller”) of $350,000. Principal payments, since its inception, on this contingent consideration promissory note totaled $232,134. The estimated fair value of the June Contingent Note at December 31, 2023 is $58,819, representing a decrease in its estimated fair value of $117,637 as compared to its estimated fair value as of December 31, 2022. This reduction only relates to the principal payments made for the year ended December 31, 2023. Therefore, the Company recorded a gain of $-0- and $27,139 in the Consolidated Statements of Operations for the years ended December 31, 2023 and December 31, 2022, respectively. On August 31, 2021, Nobility Healthcare, issued another contingent consideration promissory note (the “August Contingent Payment Note”) in connection with a stock purchase agreement between Nobility Healthcare and a private company (the “August Sellers”) of $650,000. Principal payments, since its inception, on this contingent consideration promissory note totaled $552,256. The estimated fair value of the August Contingent Note at December 31, 2023 is $129,651, representing a decrease in its estimated fair value of $259,303 as compared to is estimated fair value as of December 31, 2023. This reduction only relates to the principal payments made for the year ended December 31, 2023. Therefore, the Company recorded a loss of $-0- and $31,907 in the Consolidated Statements of Operations for the years ended December 31, 2023 and December 31, 2022, respectively. 25 On January 1, 2022, Nobility Healthcare issued another contingent consideration promissory note (the “January Contingent Payment Note”) in connection with a stock purchase agreement between Nobility Healthcare and a private company (the “January Sellers”) of $750,000. Principal payments, since its inception, on this contingent consideration promissory note totaled $153,769. The estimated fair value of the January Contingent Note at December 31, 2023 is $-0-, representing a decrease in its estimated fair value of $208,083 as compared to its estimated fair value as of December 31, 2022, of which $32,936 represents payments made during the year ended December 31, 2023. Therefore, the Company recorded a gain of $175,146 and $421,085 in the Consolidated Statements of Operations for the years ended December 31, 2023 and December 31, 2022, respectively. On February 1, 2022, Nobility Healthcare issued another contingent consideration promissory note (the “February Contingent Payment Note”) in connection with an asset purchase agreement between Nobility Healthcare and a private company (the “February Sellers”) of $105,000. The estimated fair value of the February Contingent Note at December 31, 2023 is $-0-, , representing a decrease in its estimated fair value of $4,347 as compared to its estimated fair value as of December 31, 2022, of which $1,584 represents payments made during the year ended December 31, 2023. Therefore, the Company recorded a gain of $2,763 and $100,654 in the Consolidated Statements of Operations for the years ended December 31, 2023 and 2022, respectively. Gain on Extinguishment of Warrant Derivative Liabilities We recognized a gain on the extinguishment of warrant derivative liabilities of $-0- and $3,624,794 during the year ended December 31, 2023 and December 31, 2022, respectively. This is in connection with the Warrant Exchange Agreements executed by the Company on August 23, 2022. Gain on Extinguishment of Liabilities Gain on extinguishment of liabilities increased to $550,867 for the year ended December 31, 2023, from $-0- during the year ended December 31, 2022, which reflects income related to the entertainment segment’s ability to negotiate down payables and contract liabilities during the period. This gain relates to the TicketSmarter Related Party Note payable for the entertainment segment, as a trust, the beneficiaries of which are TicketSmarter’s Chief Executive Officer and his spouse, contributed cash in the amount of $2,700,000 to TicketSmarter. Those funds were then utilized to resolve numerous outstanding payables at a discounted rate, the discount received is recognized as a gain on extinguishment of liabilities on the statement of operations. Additionally, these negotiations relieved TicketSmarter of numerous future obligations following fiscal year 2023, which will result in much more significant savings over the next several years. Other income Other income increased to $144,735 for the year ended December 31, 2023, from $-0- during the year ended December 31, 2022, which largely reflects income related to a warehouse lease within the corporate headquarters. Other expense Other expense was $-0- for the year ended December 31, 2023, a decrease from $230,744 during the year ended December 31, 2022, which reflects expense related to a note receivable adjustment. Income/(Loss) before Income Tax Benefit As a result of the above, we reported a net income/(loss) before income tax benefit of ($25,463,949) and ($18,873,758) for the years ended December 31, 2023 and 2022, respectively, a decline of $6,590,191 (35%). 26 Income Tax Benefit We recorded an income tax benefit of $-0- for the years ended December 31, 2023 and 2022, respectively. The effective tax rate for both 2023 and 2022 varied from the expected statutory rate due to our continuing to provide a 100% valuation allowance on net deferred tax assets. We determined that it was appropriate to continue the full valuation allowance on net deferred tax assets as of December 31, 2023 and 2022 primarily because of the recurring operating losses. We have further determined to continue providing a full valuation reserve on our net deferred tax assets as of December 31, 2023. During 2023, we decreased our valuation reserve on deferred tax assets by $7,870,000 whereby our deferred tax assets continue to be fully reserved due to our recent operating losses. We had approximately $145,035,000 of federal net operating loss carryforwards and $1,795,000 of research and development tax credit carryforwards as of December 31, 2023 available to offset future net taxable income. Net Loss As a result of the above, we reported a net income/(loss) of ($25,463,949) and ($18,873,758) for the years ended December 31, 2023 and 2022, respectively, a decline of $6,590,191 (35%). Net Income Attributable to Noncontrolling Interests of Consolidated Subsidiary The Company owns a 51% equity interest in its consolidated subsidiary, Nobility Healthcare. As a result, the noncontrolling shareholders or minority interest is allocated 49% of the income/loss of Nobility Healthcare which is reflected in the statement of income (loss) as “net income (loss) attributable to noncontrolling interests of consolidated subsidiary”. We reported net income (loss) attributable to noncontrolling interests of consolidated subsidiary of $224,598 and $407,933 for the years ended December 31, 2023 and 2022, respectively. Loss on Redemption – Series A & B Convertible Redeemable Preferred Stock During the year ended December 31, 2022, the Company redeemed 1,400,000 shares of Series A & 100,000 shares of Series B Preferred Stock, for a redemption price of $15,750,000, with a $13,365,000 carrying amount, resulting in a $2,385,000 loss on redemption. Net Loss Attributable to Common Stockholders As a result of the above, we reported a net loss of $25,688,547 and $21,666,691 for the years ended December 31, 2023 and 2022, respectively, a decline of $4,021,856 (19%). Basic and Diluted Income/(Loss) per Share The basic and diluted income/(loss) per share was ($9.22) and ($8.50) for the years ended December 31, 2023 and 2022, respectively, for the reasons previously noted. All outstanding stock options and common stock purchase warrants were considered antidilutive and therefore excluded from the calculation of diluted loss per share for the years ended December 31, 2023 and 2022 because all potentially dilutive securities during 2023 had exercise prices in excess of the market value of the company’s common stock and because of the net loss reported for 2023. Liquidity and Capital Resources Overall: Management’s Liquidity Plan - We have experienced net losses and cash outflows from operating activities since inception. Based upon our current operating forecast, we anticipate that we will need to restore positive operating cash flows and/or raise additional capital in the short-term to fund operations, meet our customary payment obligations and otherwise execute our business plan over the next 12 months. We are continuously in discussions to raise additional capital, which may include a variety of equity and debt instruments; however, there can be no assurance that our capital raising initiatives will be successful. Our recurring losses and level of cash used in operations, along with uncertainties concerning our ability to raise additional capital, raise substantial doubt about our ability to continue as a going concern. 27 Our Common Stock is currently listed on The Nasdaq Capital Market. In order to maintain our listing, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance requirements. There can be no assurances that we will be able to comply with the applicable listing standards. See “Nasdaq Listing” below. We had $778,149 of available cash, equivalents and restricted cash and net negative working capital of $6,963,943 as of December 31, 2023. Net working capital as of December 31, 2023, included approximately $4.7 million of accounts receivable and other receivables and $3.8 million of current inventory. Cash, cash equivalents and restricted cash: As of December 31, 2023, we had cash, cash equivalents and restricted cash with an aggregate balance of $778,149, a decrease from a balance of $3,532,199 for the year December 31, 2022. Summarized immediately below and discussed in more detail in the subsequent subsections are the main elements of the $2,754,050 net decrease in cash during the year ended December 31, 2023: ● Operating activities : $9,893,838 of net cash used in operating activities. Net cash used in operating activities was $9,893,838 and $18,580,385 for the years ended December 31, 2023 and 2022, respectively, an improvement of $8,686,547. T he improvement is attributable to a significant decrease in the non-cash gain attributable to the change in value of the warrant derivative liability in 2023 compared to 2022, as well as the decline in the usage of cash to increase inventories, prepaid expenses, and other operating assets along with the increase in operating liabilities during the year ended December 31, 2023 compared to 2022. ● Investing activities : $240,706 of net cash used in investing activities. Cash used in investing activities was $240,706 and $2,940,591 for the years ended December 31, 2023 and 2022 respectively. During the year ended December 31, 2023, we made capital expenditures for: (i) building improvements of the newly purchased office and warehouse building; and (ii) patent applications on our proprietary technology utilized in our new products and included in intangible assets. The improvement in cash used in investing activities was due to several large investing activities in 2022 including cost for the purchase of an aircraft for our BirdVu Jets subsidiary and the closing of one business acquisition and one asset acquisition that did not recur in 2023. ● Financing activities: $7,380,494 of net cash provided by financing activities. Cash provided by financing activities was $7,380,494 for the year ended December 31, 2023, compared to cash used in financing activities of $6,954,617 for the year ended December 31, 2022. In 2023, we completed a convertible note agreement, a related party note payable, a revolving loan agreement and a merchant advance for our video solution segment, received a Commercial Extension of Credit for our Entertainment Segment, receiving net proceeds of $12.5 million. We also made principal payments on the extension of credit, merchant advance and contingent consideration promissory notes and paid off the convertible loan totaling $5.2 million in principal payments. In 2022, we utilized over $4.0 million on the stock repurchase program, $2.4 million for completion of the preferred stock transaction, as well as over $0.5 million on payments of contingent consideration promissory notes related to the revenue cycle management segment. 28 The net result of these activities was a decrease in cash of $2,754,050 to $778,149 for the year ended December 31, 2023. Commitments: We had $778,149 of cash, and cash equivalents, including restricted cash of $97,600 and net negative working capital $6,963,943 as of December 31, 2023. Accounts receivable and other receivable balances represented $4,692,296 of our net working capital as of December 31, 2023. We intend to collect our outstanding receivables on a timely basis and reduce the overall level during 2024, which would help to provide positive cash flow to support our operations during 2024. Inventory represented $3,845,281 of our net working capital as of December 31, 2023. We are actively managing the level of inventory and our goal is to reduce such level during 2024 by our sales activities, the increase of which should provide additional cash flow to help support our operations during 2024. Capital Expenditures . On December 6, 2021, the Board authorized the repurchase of up to $10.0 million of the Company’s outstanding common stock under the specified terms of a share repurchase program (the “Program”). During the year ended December 31, 2022, the Company repurchased 186,299 shares of its common stock for $4,026,523, in accordance with the Program. On June 30, 2022, the Board elected to terminate the Program, effective immediately. The Program began in December 2021, with the Company purchasing a total of 273,041 shares at a cost of $6,001,602 through its termination on June 30, 2022. The Company’s revenue cycle management segment completed its third medical billing company acquisition using approximately $1.4 million in cash for the portion of the purchase price during 2022. The acquisition of the medical billing company included a contingent consideration promissory note payable to the sellers of $750,000 at closing, which management estimated its fair value of $-0- and $208,083 as of December 31, 2023 and 2022. In addition, the Company’s revenue cycle management segment completed its fourth medical billing asset acquisition using approximately $230,000 in cash for a portion of the total purchase price. The acquisition of the fourth medical billing asset purchase price included a contingent consideration promissory note payable to the sellers with an estimated fair value of $105,000 at closing which management estimated its fair value of $-0- and $4,346 as of December 31, 2023 and 2022. Lease commitments. On May 13, 2020, the Company entered into an operating lease for new warehouse and office space, which served as its new principal executive office and primary business location prior to the April 30 purchase and sale agreement. The original lease agreement was amended on August 28, 2020 to correct the footage under lease and monthly payment amounts resulting from such correction. The lease terms, as amended include no base rent for the first nine months and monthly payments ranging from $12,398 to $14,741 thereafter, with a termination date of December 31, 2026. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to its new location. The Company took possession of the leased facilities on June 15, 2020. The remaining lease term for the Company’s office and warehouse operating lease as of December 31, 2023 was thirty-six months. The Company entered into an operating lease with a third party in October 2019 for copiers used for office and warehouse purposes. The terms of the lease include 48 monthly payments of $1,598 with a maturity date of October 2023. The Company has the option to purchase such equipment at maturity for its estimated fair market value at that point in time. The lease for the Company’s copier operating lease expired was renewed in October 2023. The Company entered into an operating lease with a third party in October 2023 for copiers used for office and warehouse purposes. The terms of the lease include 48 monthly payments of $1,786 with a maturity date of October 2027. The Company has the option to purchase such equipment at maturity for its estimated fair market value at that point in time. The remaining lease term for the Company’s copier operating lease as of December 31, 2023 was forty-six months. On June 30, 2021, the Company completed the acquisition of its first medical billing company, through Nobility Healthcare. Upon completion of this acquisition, Nobility Healthcare became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $2,648 to $2,774 thereafter, with a termination date in July 2024. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The remaining lease term for the Company’s office operating lease as of December 31, 2023 was seven months. 29 On August 31, 2021, the Company completed the acquisition of its second acquired medical billing company, through Nobility Healthcare. Upon completion of this acquisition, Nobility Healthcare became responsible for the operating lease for the seller’s office space. The lease was renewed in April 2023 with favorable terms and payments ranging from $7,436 to $8,877 thereafter, with a termination date in March 2030. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The remaining term for the Company’s office operating lease was seventy-five months as of December 31, 2023. On September 1, 2021, the Company completed the acquisition of Goody Tickets, LLC and TicketSmarter, LLC through TicketSmarter. Upon completion of this acquisition, the Company became responsible for the operating lease for TicketSmarter’s office space. The lease terms include monthly payments ranging from $7,211 to $7,364 thereafter, with a termination date of December 2022. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities on September 1, 2021. The Company currently rents this space on a month-to-month basis with the intention to relocate upon the identification of suitable space. On January 1, 2022, the Company completed the acquisition of a private medical billing company, through its revenue cycle management segment. Upon completion of this acquisition, the Company became responsible for the operating lease for the seller’s office space. The lease terms include monthly payments ranging from $4,233 to $4,626, with a termination date of June 2025. The Company is responsible for property taxes, utilities, insurance and its proportionate share of common area costs related to this location. The Company took possession of the leased facilities on January 1, 2022. The remaining lease term for the Company’s office and warehouse operating lease as of December 31, 2023, was seventeen months. Lease expense related to the office spaces and copier operating leases was recorded on a straight-line basis over the lease term. Total lease expense under the five operating leases was approximately $534,830 for the year ended December 31, 2023 and included in selling, general and administrative expenses. The weighted-average remaining lease term related to the Company’s lease liabilities as of December 31, 2023 and December 31, 2022 was 4.5 years and 3.3 years, respectively. The discount rate implicit within the Company’s operating leases was not generally determinable, and therefore, the Company determined the discount rate based on its incremental borrowing rate on the information available at commencement date. As of commencement date, the operating lease liabilities reflect a weighted average discount rate of 8%. The following sets forth the operating lease right of use assets and liabilities as of December 31, 2023: Assets: Operating lease right of use assets $ 1,053,159 Liabilities: Operating lease obligations-current portion $ 279,538 Operating lease obligations-less current portion $ 827,836 Total operating lease obligations $ 1,107,374 Following are the minimum lease payments for each year and in total. Year ending December 31: 2024 $ 358,424 2025 311,849 2026 293,300 2027 117,492 Thereafter 235,020 Total undiscounted minimum future lease payments 1,316,085 Imputed interest (208,711 ) Total operating lease liability $ 1,107,374 30 Debt obligations is comprised of the following: December 31, 2023 December 31, 2022 Economic injury disaster loan (EIDL) $ 147,781 $ 150,000 Contingent consideration promissory note – Nobility Healthcare Division Acquisition 129,651 388,955 Contingent consideration promissory note – Nobility Healthcare Division Acquisition 58,819 176,456 Contingent consideration promissory note – Nobility Healthcare Division Acquisition — 208,083 Contingent consideration promissory note – Nobility Healthcare Division Acquisition — 4,346 Revolving Loan Agreement 4,880,000 — Commercial Extension of Credit – Entertainment Segment 87,928 — Unamortized debt issuance costs (540,429 ) — Merchant Advances 1,350,000 — Debt obligations 6,113,750 927,840 Less: current maturities of debt obligations 1,260,513 485,373 Debt obligations, long-term $ 4,853,237 $ 442,467 Debt obligations mature as follows as of December 31, 2023: December 31, 2023 2024 $ 1,260,513 2025 4,712,154 2026 3,542 2027 3,677 2028 and thereafter 133,864 Total $ 6,113,750 Litigation. From time to time, we are notified that we may be a party to a lawsuit or that a claim is being made against us. It is our policy to not disclose the specifics of any claim or threatened lawsuit until the summons and complaint are actually served on us. After carefully assessing the claim, and assuming we determine that we are not at fault or we disagree with the damages or relief demanded, we vigorously defend any lawsuit filed against us. We record a liability when losses are deemed probable and reasonably estimable. When losses are deemed reasonably possible but not probable, we determine whether it is possible to provide an estimate of the amount of the loss or range of possible losses for the claim, if material for disclosure. In evaluating matters for accrual and disclosure purposes, we take into consideration factors such as our historical experience with matters of a similar nature, the specific facts and circumstances asserted, the likelihood of our prevailing, the availability of insurance, and the severity of any potential loss. We re-evaluate and update accruals as matters progress over time. While the ultimate resolution is unknown, we do not expect that these lawsuits will individually, or in the aggregate, have a material adverse effect to our results of operations, financial condition or cash flows. However, the outcome of any litigation is inherently uncertain and there can be no assurance that any expense, liability or damages that may ultimately result from the resolution of these matters will be covered by our insurance or will not be in excess of amounts recognized or provided by insurance coverage and will not have a material adverse effect on our operating results, financial condition or cash flows. See Item 3, “Legal Proceedings,” of this Annual Report on Form 10-K for information on our litigation. 31 401 (k) Plan. The Company sponsors a 401(k) retirement savings plan for the benefit of its employees. The plan, as amended, requires the Company to provide 100% matching contributions for employees, who elect to contribute up to 3% of their compensation to the plan and 50% matching contributions for employee’s elective deferrals on the next 2% of their contributions. The Company made matching contributions totaling $207,463 and $223,084 for the years ended December 31, 2023 and 2022, respectively. Each participant is 100% vested at all times in employee and employer matching contributions. Critical Accounting Estimates Our significant accounting policies are summarized in Note 1, “Nature of Business and Summary of Significant Accounting Policies ,” to our consolidated financial statements. While the selection and application of any accounting policy may involve some level of subjective judgments and estimates, we believe the following accounting policies are the most critical to our financial statements, potentially involve the most subjective judgments in their selection and application, and are the most susceptible to uncertainties and changing conditions: ● Revenue Recognition / Allowance for Doubtful Accounts; ● Allowance for Excess and Obsolete Inventory; ● Goodwill and other intangible assets; ● Warranty Reserves; ● Stock-based Compensation Expense; ● Fair value of warrants; ● Fair value of assets and liabilities acquired in business combinations; ● Accounting for Income Taxes; and ● Redeemable Preferred Stock. Revenue Recognition / Allowances for Doubtful Accounts. Revenue is recognized for the shipment of products or delivery of service when all five of the following conditions are met: (i) Identify the contract with the customer; (ii) Identify the performance obligations in the contract; (iii) Determine the transaction price; (iv) Allocate the transaction price to the performance obligations in the contract; and (v) Recognize revenue when a performance obligation is satisfied. We consider the terms and conditions of the contract and our customary business practices in identifying our contracts under ASC 606. We determine we have a contract when the customer order is approved, we can identify each party’s rights regarding the services to be transferred, we can identify the payment terms for the services, we have determined the customer has the ability and intent to pay and the contract has commercial substance. At contract inception we evaluate whether the contract includes more than one performance obligation. We apply judgment in determining the customer’s ability and intent to pay, which is based on a variety of factors, including the customer’s historical payment experience or, in the case of a new customer, credit and financial information pertaining to the customer. 32 Performance obligations promised in a contract are identified based on the services and the products that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the services and the products is separately identifiable from other promises in the contract. Our performance obligations consist of (i) products, (ii) professional services, and (iii) extended warranties. The transaction price is determined based on the consideration to which we expect to be entitled in exchange for transferring services to the customer. Variable consideration is included in the transaction price if, in our judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. None of our contracts contain a significant financing component. If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on the relative standalone selling price (“SSP”). Revenue for our video solutions segment is recognized at the time the related performance obligation is satisfied by transferring the control of the promised service to a customer. Revenue is recognized when control of the service is transferred to the customer, in an amount that reflects the consideration that we expect to receive in exchange for our services. We generate all our revenue from contracts with customers. Revenue for our revenue cycle management segment is recorded on a net basis, as its primary source of revenue is its end-to-end service fees. These service fees are reported as revenue monthly upon completion of our performance obligation to provide the agreed upon services. Revenue for our entertainment segment is recorded on a gross or net basis based on management’s assessment of whether we are acting as a principal or agent in the transaction. The determination is based upon the evaluation of control over the event ticket, including the right to sell the ticket, prior to its transfer to the ticket buyer. We sell our tickets held in inventory, which consists of one performance obligation, being to transfer control of an event ticket to the buyer upon confirmation of the order. We act as the principal in these transactions as we own the ticket at the time of sale, therefore we control the ticket prior to transferring to the customer. In these transactions, revenue is recorded on a gross basis based on the value of the ticket and is recognized when an order is confirmed. Payment is typically due upon delivery of the ticket. We also act as an intermediary between buyers and sellers through the online secondary marketplace. Revenues derived from this marketplace primarily consist of service fees from entertainment operations, and consists of one primary performance obligation, which is facilitating the transaction between the buyer and seller, being satisfied at the time the order has been confirmed. As we do not control the ticket prior to the transfer, we act as an agent in these transactions. Revenue is recognized on a net basis, net of the amount due to the seller when an order is confirmed, the seller is then obligated to deliver the tickets to the buyer per the seller’s listing. Payment is due at the time of sale. We review all significant, unusual, or nonstandard shipments of products or delivery of services as a routine part of our accounting and financial reporting process to determine compliance with these requirements. Extended warranties are offered on selected products, and when a customer purchases an extended warranty, the associated proceeds are treated as contract liability and recognized over the term of the extended warranty. For our video solutions segment, our principal customers are state, local, and federal law enforcement agencies, which historically have been low risks for uncollectible accounts. However, we have commercial customers and international distributors that present a greater risk for uncollectible accounts than such law enforcement customers and we consider a specific reserve for bad debts based on their individual circumstances. As of December 31, 2023, our historical bad debts have been negligible, with less than $323,000 charged off as uncollectible on cumulative revenues of $284.8 million since we commenced deliveries in 2006. 33 For our entertainment segment, our customers are mainly online visitors that pay at the time of the transaction, and we collect the service fees charged with the transaction. Thus, leading to minimal risk for uncollectible accounts, to which we then consider a specific reserve for bad debts based on their individual circumstances. As we continue to learn more about the collectability related to this recent acquisition, we will track historical bad debts and continue to assess appropriate reserves. For our revenue cycle management segment, our customers are mainly medium to large healthcare organizations that are charged monthly upon the execution of our services. Being these customers are healthcare organizations with minimal risk for uncollectible accounts, we consider a specific reserve for bad debts based on their individual circumstances. As we continue to learn more about the collectability related to this recently added segment, we will track historical bad debts and continue to assess appropriate reserves. As of December 31, 2023, and 2022, we had provided a reserve for doubtful accounts of $200,668 and $152,736, respectively. We periodically perform a specific review of significant individual receivables outstanding for risk of loss due to uncollectability. Based on such review, we consider our reserve for doubtful accounts to be adequate as of December 31, 2023. However, should the balance due from any significant customer ultimately become uncollectible then our allowance for bad debts will not be sufficient to cover the charge-off and we will be required to record additional bad debt expense in our statement of operations. Allowance for Excess and Obsolete Inventory. We record valuation reserves on our inventory for estimated excess or obsolete inventory items. The amount of the reserve is equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. On a quarterly basis, management performs an analysis of the underlying inventory to identify reserves needed for excess and obsolescence. Management uses its best judgment to estimate appropriate reserves based on this analysis. In addition, we adjust the carrying value of inventory if the current market value of that inventory is below its cost. Inventories consisted of the following as of December 31, 2023 and 2022: December 31, 2023 December 31, 2022 Raw material and component parts $ 3,044,653 $ 4,509,165 Work-in-process 20,396 3,164 Finished goods – video solutions 4,623,489 6,846,091 Finished goods – entertainment 699,204 970,527 Subtotal 8,387,742 12,328,947 Reserve for excess and obsolete inventory – video solutions (4,355,666 ) (5,230,261 ) Reserve for excess and obsolete inventory – entertainment (186,795 ) (259,280 ) Total inventories $ 3,845,281 $ 6,839,406 We balance the need to maintain strategic inventory levels to ensure competitive delivery performance to our customers against the risk of inventory obsolescence due to changing technology and customer requirements. As reflected above, our inventory reserves represented 54.2% of the gross inventory balance as of December 31, 2023, compared to 44.5% of the gross inventory balance as of December 31, 2022. We had $4,542,461 and $5,489,541in reserves for obsolete and excess inventories as of December 31, 2023 and 2022, respectively. Total raw materials and work-in-process was $3,065,049 and $4,512,329 as of December 31, 2023 and 2022, respectively, a decrease of $1,447,280 (32%). Finished goods balances were $5,322,693 and $7,816,618 as of December 31, 2023 and 2022, respectively, a decrease of $2,493,925 (32%). The decrease in finished goods was primarily attributable to declining inventory for the new Shield product line, our new body-worn cameras and docking stations, along with a decline in inventory from our entertainment segment, acquired in September 2021. The decrease in the inventory reserve is primarily due to disposal of obsolete inventory previously reserved. 34 If actual future demand or market conditions are less favorable than those projected by management or significant engineering changes to our products that are not anticipated and appropriately managed, additional inventory write-downs may be required in excess of the inventory reserves already established. Goodwill and other intangible assets. When we acquire a business, we determine the fair value of the assets acquired and liabilities assumed on the date of acquisition, which may include a significant amount of intangible assets such as customer relationships, software and content, as well as goodwill. When determining the fair values of the acquired intangible assets, we consider, among other factors, analyses of historical financial performance and an estimate of the future performance of the acquired business. The fair values of the acquired intangible assets are primarily calculated using an income approach that relies on discounted cash flows. This method starts with a forecast of the expected future net cash flows for the asset and then adjusts the forecast to present value by applying a discount rate that reflects the risk factors associated with the cash flow streams. We consider this approach to be the most appropriate valuation technique because the inherent value of an acquired intangible asset is its ability to generate future income. In a typical acquisition, we engage a third-party valuation expert to assist us with the fair value analyses for acquired intangible assets. Determining the fair values of acquired intangible assets requires us to exercise significant judgment. We select reasonable estimates and assumptions based on evaluating a number of factors, including, but not limited to, marketplace participants, consumer awareness and brand history. Additionally, there are significant judgments inherent in discounted cash flows such as estimating the amount and timing of projected future cash flows, the selection of discount rates, hypothetical royalty rates and contributory asset capital charges. Specifically, the selected discount rates are intended to reflect the risk inherent in the projected future cash flows generated by the underlying acquired intangible assets. Determining an acquired intangible asset’s useful life also requires significant judgment and is based on evaluating a number of factors, including, but not limited to, the expected use of the asset, historical client retention rates, consumer awareness and trade name history, as well as any contractual provisions that could limit or extend an asset’s useful life. The Company’s goodwill is evaluated in accordance with FASB ASC Topic 350, which requires goodwill to be assessed for impairment at least annually and whenever events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. In addition, an impairment evaluation of our amortizable intangible assets may also be performed if events or circumstances indicate potential impairment. Among the factors that could trigger an impairment review are current operating results that do not align with our annual plan or historical performance; changes in our strategic plans or the use of our assets; restructuring charges or other changes in our business segments; competitive pressures and changes in the general economy or in the markets in which we operate; and a significant decline in our stock price and our market capitalization relative to our net book value. When performing our annual assessment of the recoverability of goodwill, we initially perform a qualitative analysis evaluating whether any events or circumstances occurred or exist that provide evidence that it is more likely than not that the fair value of any of our reporting units is less than the related carrying amount. If we do not believe that it is more likely than not that the fair value of any of our reporting units is less than the related carrying amount, then no quantitative impairment test is performed. However, if the results of our qualitative assessment indicate that it is more likely than not that the fair value of a reporting unit is less than its respective carrying amount, then we perform a two-step quantitative impairment test. Evaluating the recoverability of goodwill requires judgments and assumptions regarding future trends and events. As a result, both the precision and reliability of our estimates are subject to uncertainty. Among the factors that we consider in our qualitative assessment are general economic conditions and the competitive environment; actual and projected reporting unit financial performance; forward-looking business measurements; and external market assessments. To determine the fair values of our reporting units for a quantitative analysis, we typically utilize detailed financial projections, which include significant variables, such as projected rates of revenue growth, profitability and cash flows, as well as assumptions regarding discount rates, the Company’s weighted average cost of capital and other data. 35 Our most recent annual impairment test of goodwill conducted as of December 31, 2023, indicated no impairment. Subsequent to completing our 2023 annual impairment test, no events or changes in circumstances were noted that required an interim goodwill impairment test. Note 1 — Nature of Business and Summary of Significant Accounting Policies and Note 8 — Goodwill and Other Intangible Assets in the Notes to Consolidated Financial Statements provide additional information regarding the Company’s goodwill and other intangible assets. Warranty Reserves. We generally provide up to a two-year parts and labor standard warranty on our products to our customers. Provisions for estimated expenses related to product warranties are made at the time products are sold. These estimates are established using historical information on the nature, frequency, and average cost of claims. We actively study trends of claims and take action to improve product quality and minimize claims. Our warranty reserves were increased to $17,699 as of December 31, 2023 compared to $15,964 as of December 31, 2022 as we begin to slow our warranty exposures through the roll-off of DVM-750 and DVM-800 units from warranty coverage. Standard warranty exposure on the DVM-800 and DVM-250plus are the responsibility of the contract manufacturers, which reduced our overall warranty exposure as these are very popular products in our line. There is a risk that we will have higher warranty claim frequency rates and average cost of claims than our history has indicated on our legacy mirror products on our new products for which we have limited experience. Actual experience could differ from the amounts estimated requiring adjustments to these liabilities in future periods. Stock-based Compensation Expense . We grant stock options to our employees and directors and such benefits provided are share-based payment awards which require us to make significant estimates related to determining the value of our share-based compensation. Our expected stock-price volatility assumption is based on historical volatilities of the underlying stock that are obtained from public data sources and there were no stock options granted during the year ended December 31, 2023. If factors change and we develop different assumptions in future periods, the compensation expense that we record in the future may differ significantly from what we have recorded in the current period. There is a high degree of subjectivity involved when using option pricing models to estimate share-based compensation. Changes in the subjective input assumptions can materially affect our estimates of the fair value of our share-based compensation. Certain share-based payment awards, such as employee stock options, may expire worthlessly or otherwise result in zero intrinsic value compared to the fair values originally estimated on the grant date and reported in our financial statements. Alternatively, values may be realized from these instruments that are significantly in excess of the fair values originally estimated on the grant date and reported in our financial statements. Although the fair value of employee share-based awards is determined using an established option pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction. In addition, we account for forfeitures as they occur. Warrant derivative liabilities. On April 5, 2023, the Company issued warrants to purchase a total of 1,125,000 shares of Common Stock. The warrant terms provide for net cash settlement outside the control of the Company under certain circumstances in the event of tender offers. As such, the Company is required to treat these warrants as derivative liabilities which are valued at their estimated fair value at their issuance date and at each reporting date with any subsequent changes reported in the consolidated statements of operations as the change in fair value of warrant derivative liabilities. The Company has utilized the following assumptions in its Black-Scholes option valuation model to calculate the estimated fair value of the warrant derivative liabilities as of their date of issuance and as of December 31, 2023: Issuance date assumptions December 31, 2023 assumptions Volatility - range 106.0 % 105.4 % Risk-free rate 3.36 % 3.84 % Dividend 0 % 0 % Remaining contractual term 5.0 years 4.3 years Exercise price $ 5.50 - 7.50 $ 5.50 - 7.50 Common stock issuable under the warrants 1,125,000 1,125,000 36 Accounting for Income Taxes. Accounting for income taxes requires significant estimates and judgments on the part of management. Such estimates and judgments include, but are not limited to, the effective tax rate anticipated to apply to tax differences that are expected to reverse in the future, the sufficiency of taxable income in future periods to realize the benefits of net deferred tax assets and net operating losses currently recorded and the likelihood that tax positions taken in tax returns will be sustained on audit. As required by authoritative guidance, we record deferred tax assets or liabilities based on differences between financial reporting and tax bases of assets and liabilities using currently enacted rates that will be in effect when the differences are expected to reverse. Authoritative guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that all or some portion of the deferred tax asset will not be realized. As of December 31, 2023, cumulative valuation allowances in the amount of $42,070,000 were recorded in connection with the net deferred income tax assets. Based on a review of our deferred tax assets and recent operating performance, we determined that our valuation allowance should be increased by $ 7,870,000 to a balance of $42,070,000 to fully reserve our deferred tax assets at December 31, 2023. We determined that it was appropriate to continue to provide a full valuation reserve on our net deferred tax assets as of December 31, 2023, because of the overall net operating loss carryforwards available. We expect to continue to maintain a full valuation allowance until we determine that we can sustain a level of profitability that demonstrates our ability to realize these assets. To the extent we determine that the realization of some or all of these benefits is more likely than not based upon expected future taxable income, a portion or all of the valuation allowance will be reversed. Such a reversal would be recorded as an income tax benefit and, for some portion related to deductions for stock option exercises, an increase in shareholders’ equity. As required by authoritative guidance, we have performed a comprehensive review of our portfolio of uncertain tax positions in accordance with recognition standards established by the FASB, an uncertain tax position represents our expected treatment of a tax position taken in a filed tax return or planned to be taken in a future tax return, that has not been reflected in measuring income tax expense for financial reporting purposes. We have no recorded liability as of December 31, 2023, representing uncertain tax positions. We have generated substantial deferred income tax assets related to our operations primarily from the charge to compensation expense taken for stock options, certain tax credit carryforwards and net operating loss carryforwards. For us to realize the income tax benefit of these assets, we must generate sufficient taxable income in future periods when such deductions are allowed for income tax purposes. In some cases where deferred taxes were the result of compensation expense recognized on stock options, our ability to realize the income tax benefit of these assets is also dependent on our share price increasing to a point where these options have intrinsic value at least equal to the grant date fair value and are exercised. In assessing whether a valuation allowance is needed in connection with our deferred income tax assets, we have evaluated our ability to generate sufficient taxable income in future periods to utilize the benefit of the deferred income tax assets. We continue to evaluate our ability to use recorded deferred income tax asset balances. If we fail to generate taxable income for financial reporting in future years, no additional tax benefit would be recognized for those losses, since we will not have accumulated enough positive evidence to support our ability to utilize net operating loss carryforwards in the future. Therefore, we may be required to increase our valuation allowance in future periods should our assumptions regarding the generation of future taxable income not be realized. 37 Redeemable Preferred Stock. Preferred stock may be classified as a liability, temporary equity (i.e., mezzanine equity) or permanent equity. In order to determine the appropriate classification, an evaluation of the cash redemption features is required. Where there exists an absolute right of redemption presently or in the future, the preferred stock would be classified as a liability. If redemption is contingently redeemable upon the occurrence of an event that is outside of the issuer’s control, it should be classified as mezzanine equity. The probability that the redemption event will occur is irrelevant. If no redemption features exist, or if a contingent redemption feature is within the Company’s control, the preferred stock would be considered equity. Inflation and Seasonality Inflation has not materially affected us during the past fiscal year; however, we believe that it is likely to have significant impact to all of our operating segments in 2024 and beyond. We do not believe that our business is seasonal in nature; however, we generally generate higher revenues during the second half of the calendar year compared to the first half. Item 7a. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. Item 8. Financial Statements and Supplementary Data. Our financial statements are included in this Annual Report on Form 10-K commencing on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.